Conflict coming between Alberta and Ottawa over oil/gas methane reduction?

Rachel Notley’s Climate Leadership Plan committed Alberta to reduce methane emissions by 45 per cent by 2025. Will the new Jason Kenney government follow through on that commitment? This is a tough file, with plenty of technical challenges, and the federal government will be breathing down the industry’s neck if the Province pulls back.

Methane is a colourless, odourless, flammable greenhouse gas. It is the main constituent of natural gas. The global warming potential of methane is significant—it is estimated to be 25 times greater than that of carbon dioxide over a 100-year period. In 2014, oil and gas production accounted for approximately 70 per cent of the province’s methane emissions.

Eric Denhoff. Source: Canadian Hydrogen and Fuel Cell Association.

During 2017 and 2018, industry sparred with the Province and environmental organizations about the best and least costly approaches to implement the 45 per cent reduction target. Lurking behind Alberta’s efforts was the Government of Canada, committed to the same reduction target on a national basis and working to ensure Alberta’s oil and gas industry meets the targets.

Industry’s main complaint is that the methane reduction targets arrived at the same time other significant environmental and related initiatives hit, such as Alberta economy-wide carbon pricing, caribou protection (with both cost and land use access implications), and the federal low-carbon fuel initiative.

Led by CNRL, the industry pushed back hard. A big concern was competitiveness. American oil and gas producing jurisdictions had no carbon levy. And President Donald Trump and some states were weakening methane-reduction requirements. Industry wanted a results-based approach where they would be given the freedom to implement how, when and where they chose to meet the 2025 target.

Environmental Non-Government Organizations (ENGOS), and to some extent government, wanted prescriptive requirements to implement specific changes year by year. Without that approach, the industry could delay adoption in early years, and then throw up its hands as it approached 2025 without meeting the mandated targets, saying, “we tried really hard but just couldn’t get there.”

methane emissions
Measuring fugitive methane emission leaks.

This impasse led Environment Minister Shannon Phillips and Premier Notley’s office to twice hold offline discussions between Pembina Institute and CNRL (representing industry) to try and find a middle ground. In the end, those discussions did not resolve the outstanding issues. The Notley government had no choice but to begin implementation, which was managed by the Alberta Energy Regulator.

To assist the industry in the transition, Minister Phillips provided incentives for companies to quickly study their methane exposure issues. The incentives were designed after intensive lobbying by an industry group interested in helping small and medium-sized operators, which during a recession had no free cash for studies or upgrades, to get help to quantify problems through quick and relatively inexpensive studies, and then accessing incentive capital to fix the problems. Study grants were around $600 per well, more for more complex facilities, and then capital grants of up to $250,000 for smaller operations and as much as $2 million for multi-facility, larger operations.

The incentives helped companies to:

  • Undertake LDAR (leak detection and repair) studies to identify problem areas and a path forward;
  • Baseline Operations Studies also could identify issues and a plan for a way forward;
  • Between these study programs, methane leaks throughout a company could be identified and repaired quickly, utilizing additional funds beyond the study incentives;
  • Facilities already having an assessment of their methane issues cold proceed directly to a capital program, which provides funds to assist the company in dealing with a host of capital projects to reduce or eliminate methane emissions.The program was immediate, responsive, geared to the exact business needs of small and medium operators and provided an opportunity for industry and government to show early and effective progress in reducing emissions in the small and medium-sized business sector—low hanging fruit in some senses.Whether the Alberta regulations will satisfy the federal government remains an open question to be debated between Edmonton and Ottawa, but the general direction has been set.

    In addition to these programs aimed at small and medium businesses, Alberta created another opportunity for industry to transition through its treatment of methane reduction as an offset under Quantification Protocols related to the Carbon Competitiveness Incentive Regulation, the Notley government’s large emitter program. The government recognized methane reduction by a company as generating a credit for the amount of methane reduced, a credit that could be sold and cash recovered to offset some of the costs, or a credit that could be used by the company by turning it in to meet compliance costs of the company under CCIR.

    Estimates by the government were that this methane offset approach, combined with the small and medium business methane reduction incentives, could put more than $1 billion of incentives into industry’s hands to assist in the transition, the overall cost of which could easily exceed a billion – and some estimates were much higher.

    Now, fast forward to May 2019 and there is a new United Conservative Party government. Program applications for the Energy Efficiency Alberta programs stopped and questions about the recognition and continuation of the offsets program now raised. Will the government continue these incentives? If so, at what levels, what volumes for offsets, what levels of grants for small and medium business repair and equipment upgrading?

    Also, what is happening to the offset market in general? Alberta companies can only use credits created in Alberta, ensuring that the dollars don’t end up leaking to a lower offset cost jurisdiction like California.

    But, with compliance obligations under the revamped CCIR to look more like the old Specified Gas Emitters Regulation, and prices reduced to $20 a tonne from $30 a tonne, and stringency reduced, then big companies who can’t meet their GHG or methane reduction targets will want to by offsets, in some cases, because they were historically cheaper than paying into the Emissions Reduction Agency for green tech development.

    For example, if you are a cement or oil sands or fertilizer company and go over the target for emissions by 100 tonnes, you can then pay now, $20 a tonne to ERA or equivalent tech organization to comply. Or, you could comply by buying offsets. $20 compliance price would normally see you able to buy offsets much cheaper, maybe $15 or lower, so that’s what you would do.

    However, there is a complex relationship between the highly variable company needs for offsets and the amount produced by others and the price in the market for those credits.

    Lower the requirements to reduce pollution, as the UCP plan does, and lower the per tonne compliance price, and there’s less demand for credits, and so prices would fall, perhaps even collapse, and another part of the industry dependent on revenue from credits suffers.

    It is too early, to be fair, for UCP to have worked through all of these details, but there will be growing pressure on GOA to outline where it is at on methane, and there will be growing  pressure from CNRL and industry to further loosen the methane requirements, and further pressure from Ottawa, if the Liberals are re-elected, to aggressively monitor and enforce on the issue.

    And, given that Ottawa has not formally recognized Alberta’s regulations as “equivalent” to Ottawa’s, there is still the real potential of a dust-up between Alberta and Ottawa on one more sore spot.

    The next six months to a year will be telling as to where Alberta ends up on methane, a topic being very closely watched by domestic and international environmental organizations, who will pressure Ottawa to step in and substitute their regulations in Alberta if the government is perceived to be walking back commitments on methane.

    ENGOs will hammer Alberta in the international investor/lender/shareholder forums, which in turn could make capital more expensive and more difficult to access.

    This is a tricky file that requires some finesse and diplomacy. We’ll see if Premier Kenney and his team are up to the task.

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